1 Introduction Following a consultation process that lasted several years, the Basel Committee on Banking Supervision (BCBS) published the revised framework “International Convergence of Capital Measurement and Capital Standards” (Basel II) in June 2004. The Capital Requirements Directive, comprising the recast EU directives 2006/48/EC and 2006/49/EC, transposed the Basel II provisions into EU law. These directives, in turn, were transposed into Austrian law by amending the Austrian Banking Act (Bankwesengesetz – BWG) in August 2006 and by publishing the new Solvency Regulation (Solvabilitätsverordnung – SolvaV) and Disclosure Regulation (Offenlegungsverordnung – 1
OffV) in October 2006. The Basel II revised international capital framework finally entered into force in Austria on January 1, 2007.1 The new framework allows banks to use the IRB approach for the calculation of the assessment base for credit risk (IRB approach under Article 22b Austrian Banking Act), subject to regulatory approval, which can only be obtained if the internal rating systems meet a number of requirements that are defined under Article 37 ff. of the Solvency Regulation. One of these requirements stipulates that banks must demonstrate that their rating models have good predictive power, and that the model must be quantitatively and qualitatively validated on an annual basis
By exercising areas of national discretion, Austrian banks can postpone the application of the new regulations to January 1, 2008.
Financial Stabilit y Report 14
Quantitative Validation of Rating Models for Low Default Portfolios through Benchmarking
(Articles 41 and 59 of the Solvency Regulation). The statistical methods typically used to perform quantitative validation require a significant amount of default data to derive valid statements about the model, which may be problematic in the case of rating models for low default portfolios (LDPs), i.e. portfolios for which banks have little default history, e.g. sovereigns. Therefore, this paper presents an alternative method for the quantitative validation of rating models that can be used to assess the predictive power of...